UNAM 1 – The profit investment nexus

My first lecture to the economics faculty of the Autonomous National University of Mexico (UNAM) was on the relationship between profits and profitability and investment and economic growth in capitalist economies. Do profits and profitability lead investment and GDP into slumps and out of them, or vice versa?  In my view, this is one of the big divisions between the Keynesian and Marxist theory of crises, or booms, slumps and depressions in capitalism. For all the references to research etc made below, see my paper: The profit investment nexus

In my presentation, I first pointed out that both Marxist and Keynesian analysis agree that investment (especially business investment) is the key driver of economic growth and the main swing factor in the capitalist business cycle of boom and slump.  This is contrary to the view of neoclassical theory, where in so far as it has any theory of crises at all, it starts from the premiss that the ‘consumer is king’ and that the ups and downs of consumer demand explain booms and slumps.  At least, the more sophisticated version of Keynesian theory recognises ‘effective demand’ (the Keynesian indicator of crises) under capitalism is primarily investment, not consumption – although many Keynesians seem to slip into the latter as the cause.

If we analyse the changes in investment and consumption prior to each recession or slump in the post-war US economy, we find that consumption demand has played little or no leading role in provoking a slump.  In the six recessions below, personal consumption fell less than GDP or investment on every occasion and does not fall at all in 1980-2.  Investment fell by 8-30% on every occasion.

But after that comes the difference with Marxist analysis.  The Keynesian macro-identities suggest that investment drives GDP, employment and profits through the mechanism of effective demand.  But Marxist theory says that it is profit that ‘calls the tune’, not investment.  Profit is part of surplus value, or the unpaid labour in production.  It is the result of the exploitation of labour – something ignored or denied by Keynesian theory, where profit is the result of ‘capital’ as a factor of production.

In my presentation, I argued that Keynesian macro-identities are thus ‘back to front’: investment does not ‘cause’ profit; profit ‘causes’ investment.  Moreover there is little empirical evidence that investment drives profits as the Keynesian model would suggest. And there is little evidence that government spending or budget deficits (net borrowing) restore economic growth or end slumps.  These end only when the profitability of business capital is revived.  Thus the Keynesian multiplier is less compelling than the ‘Marxist multiplier’.

For Keynesians, the causal direction is that investment creates profit. For orthodox Keynesians, crises come about because of a collapse in aggregate or ‘effective demand’ in the economy (as expressed in a fall of investment and consumption).  This fall in investment leads to a fall in employment and thus to less income.  Effective demand is the independent variable and incomes and employment are the dependent variables.  There is no mention of profit or profitability in this causal schema.

Keynes understood the central role of profit in the capitalist system. “Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.” But for him, and Michal Kalecki, the guru of post-Keynesian analysis of crises, investment creates profits not vice versa.  “Nothing obviously, can restore employment which does not first restore business profits. Yet nothing, in my judgement, can restore business profits that does not first restore the volume of investment.”  (Keynes).  To use the pithy phrase of Hyman Minsky, devoted follower of Keynes, “it is investment that calls the tune.”

As Jose Tapia has pointed out that “for the whole Keynesian school, investment is the key variable explaining macroeconomic dynamics and leading the cycle.”  But if investment is the independent variable, according to Keynes, what causes a fall in investment? For Keynes, it is loss of ‘animal spirits’ among entrepreneurs, or a ‘lack of confidence’ in employing funds for investment.  As Minsky said, investment is dependent on “the subjective nature of expectations about the future course of investment, as well as the subjective determination of bankers and their business clients of the appropriate liability structure for the financing of positions in different types of capital assets”

As Paul Mattick Snr retorted about the Keynesian explanation, “what are we to make of an economic theory, which after all claimed to explain some of the fundamental problems of twentieth-century capitalism, which could declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends’?

In my presentation, I suggested that what if we turn the causal direction the other way.  Marx’s theory of value tells us that all value is created by labour and profit is a product of the exploitation of labour power and its appropriation by capital.  Then we have a theory of profit and investment based on an objective causal analysis within a specific form of class society.  And now, investment in an economy depends on profits.

With Marx, profit is the result of the exploitation of labour (power) and thus is logically prior to investment.  But it is also temporally prior.  If we adopt a theory that profits cause or lead investment, that ‘profits call the tune’, not investment, then we can construct a reasonably plausible cycle of profit, investment and economic activity.

And not only is this the Marxist approach theoretically more realistic and valid, there is a wealth of empirical evidence to support the analysis that profits lead investment, not vice versa.  I gave a long list of studies along these lines, from both mainstream and Marxist analysts, including my own (see my paper above).

My presentation then went on to draw the policy conclusions from the difference between Keynesian and Marxist analysis.  It is the kernel of Keynesian economic policy that the way out of economic recession under capitalism is to boost ‘effective demand’. And in a ‘depression’, it will be necessary to stimulate this demand, either by easing the cost of investment or consumer borrowing (monetary policy) and/or by government spending (fiscal policy).

But if the Marxist analysis is right, then this is a utopian policy. Government spending and tax increases or cuts must be viewed from whether they boost or reduce profitability. If they do not raise profitability or even reduce it, then any short-term boost to GDP from more government spending will only be at the expense of a lengthier period of low growth and an eventual return to recession.

There is no assurance that more spending means more profits – on the contrary.  Government investment in infrastructure may boost profitability for those capitalist sectors getting the contracts, but if it is paid for by higher taxes on profits, there is no gain overall.  And if it is financed by borrowing, profitability will eventually be constrained by a rising cost of capital.

I then outlined a load of empirical evidence to show that the so-called Keynesian ‘multiplier’ of government spending boosting real GDP growth was ineffective, and the ‘Marxist multiplier’, to coin the term from G Carchedi, that investment and growth under capitalism only really responds to changes in profitability and profits, was way more compelling.

I compared average real GDP growth against the average change in government spending and as a ratio of the change in the net return on capital for successive decades since 1960.  Real GDP growth is strongly correlated with changes in the profitability of capital (Marxist multiplier), while the correlation was negative with changes in government spending (Keynesian multiplier).  The Marxist multiplier was considerably higher in three out of the five decades, and particularly in the current post Great Recession period.  And in the other two decades, the Keynesian multiplier was only slightly higher and failed to go above 1.

There was some discussion from the floor about the validity of econometric causal analysis in reaching these results and their statistical significance.  But I think we can safely say that there was stronger evidence that the Marxist multiplier is more relevant to economic recovery under capitalism than the Keynesian multiplier.

In her commentary on my presentation, Professor Gloria Martinez from UNAM, carefully considered my arguments, making the point that it was not a fall in profitability that was the direct cause of slumps, but in particular, the eventual fall in the mass of profit.  And so there is an issue of how crises can take place when the rate of profit is rising, as it was in the neo-liberal period from the 1980s.

Well, there are several responses to that.  First, many studies show that the overall rate of profit in the US and elsewhere stopped rising after the end of the millennium – the neoliberal recovery was over.  Indeed, profitability in the US began to fall from 2006, well before the credit crunch and the Great Recession, as did eventually the mass of profit.  So the Marxist analysis still holds.

Second, as Carchedi has shown, if you strip out the counteracting factor of a rising rate of surplus value from the 1980s, the law of profitability ‘as such’ was still operating.  Indeed, crises occur when total new value (wages and profit) fell or slowed markedly and Marx’s law of profitability then asserted itself.

The other response comes from the issue of fictitious profits and the rise of finance capital in the neo-liberal period, but particularly after 2002.  This was raised by several members of the audience.  After 2002, total profits in the US rose sharply but investment did not follow.  So where was the profits-investment nexus then?  Well, if you strip out the profits from fictitious capital (financial speculation in stocks and bonds with credit), then profitability was falling from 2002 – this is what a study by Peter Jones from Australia has shown (see paper).

Second, if you strip out finance capital profits (not all of which is fictitious because interest income and commissions are revenue for banks and finance houses), profitability in the productive sector of the US economy was weak and falling and has not really recovered since the end of the Great Recession.

The conclusions of my presentation were that:

1) the Keynesian view that effective demand and investment drive profits is logically weak and empirically unproven;

2) the Marxist view is that profitability and profits drive investment in a capitalist economy.  This is theoretically logical and empirically supported;

3) this implies that it is the Marxist multiplier (the changes in real GDP relative to profitability) that is a better guide to any likely recovery in a capitalist economy than the Keynesian multiplier (changes in real GDP relative to government net spending – dissaving) and

4) Keynesian fiscal (and monetary) stimulus policy prescriptions are unlikely to work in restoring investment, growth and employment in a capitalist economy – indeed they could even delay recovery.

31 thoughts on “UNAM 1 – The profit investment nexus

  1. As a follow-on question to point 4, what would the Marxist model suggest is the practice to follow in order to rebound after a crisis?

      1. I understand the idea that the boom/bust cycle continues under capitalism, but there’s no mitigation available meantime?

      2. Good question. Any government investment and spending on services would help. Rise in wages and benefits etc. But of course that would drive profits lower and business could go on an investment ‘strike’. But as many reforms and improvements for labour as possible must be fought for and implemented.

  2. I live in a capitalist economy and hope to see its demise one day. But, if I am reading your presentation correctly, in order for the economy to get better in this capitalist shit show I live under, there must be MORE profits which can only come from MORE exploitation of our class.

    Is this correct? If we want a better economy, growth in GDP and more employment, we must endure more austerity and allow the masters to extract even more profits because “Profits drive investment..”

    It is kind of strange to me. I see what you wrote. I think I understand what you said. I am just trying to see where you are going with this… and I keep coming back to “profits drive investments… drives GDP… drives employment etc… “ and since profits are based on exploitation, then it seems that if we want a better economy under capitalism, we need to accept more exploitation. Of course, as Marxists, we don’t want either the exploitation or the capitalist economy, so perhaps a revolution is in order?

      1. Thanks. I just need reassurance sometimes;) By the way, there are many comrades and friends of mine that follow your blogs/posts and share them. The work is appreciated.

        I would be fascinated to hear you being interviewed by Richard D Wolff on his radio show/podcast sometime. Food for thought;)

    1. At the moment we have political blocks which are anti austerity and political blocks which are pro austerity.Both are pro capitalist.

      The anti austerity block will tell you that austerity is damaging, not required and the ruling elite is so greedy they won’t countenance anything that takes away anything from their wealth and so push austerity just out of greed. This is only partly true.

      Capitalism is a system where the bourgeois are dominant over the proletariat and the system is designed to enrich them at the expense of the working class.

      So while both political blocks have different immediate views of austerity they are essentially the same.

      At some point the sheer greed of the ruling class must start to bite them on the backside so they will need to be saved from themselves. At this point the anti austerity side will hold some sway, gain some concessions but only because it helps the ruling classes. But that won’t last and sure as night becomes day the pro austerity side will grab back the advantage.

      This is how this system works, it isn’t until the ruling classes feel the heat that anything gets done. Currently in the West getting rid of plastic is a high priority, this is because the rest of the world are starting to tell the West, you ain’t dumping that here anymore. So because they can’t dump the plastic on the natives they now decide something must be done!

      Incidentally on that score the the US are 4% of the global population and consume 25% of the worlds produce. They also go around the world preaching values to everyone while doing jack shit to address this iniquity.

      Scumbags like Arthur even say entire regions should be laid to waste to promote these values!

      And moreover some Marxist sites think this is all ok and contributes to open debate!

      On that score one of the most valuable contributors to the open debate of ideas, Sartesian, seems to have disappeared. I do hope this isn’t because of the open door policy to scumbags like Arthur.

      Come back Sartesian!

      1. Thanks for the kind words. Indeed, it is because of the “open door policy to scumbags like Arthur” that I will not participate in the discussions on this site. Arthur has endorsed the US led destruction of Iraq. I would no sooner participate in a website that affords him access, under the cover of “Marxism” than I would participate if access were granted to the likes of Wolfowitz, or Condoleeza Rice.

        I’d wish best of luck to those who “stay,” but how anyone can accept the presence of this “scumbag,” to use SIOB’s term, is beyond my comprehension.

        Anybody interested in what I might get right, and/or wrong, in my investigations and applications of Marxism can check out

      2. ” Arthur has endorsed the US led destruction of Iraq.” Not to mention the destruction of Syria. What will it be from him next?

        ”Head Choppers of the World Unite!”

  3. Michael, requesting a clarification:

    When you say “profits drive investments” are you referring to “investment” as purchases of means of production only, or purchases of both means of production AND labor power as part of the capital accumulation process, M – C-C’ – M’ ?

    Are you discussing whether profitability drives purchases of Department 1 commodities, or whether profitability drives M-C-M’ capital accumulation in the capitalist economy overall?

    Both are true, but are different questions.


    1. Investment means means of production (fixed capital and raw materials) and labour power (employment). Profitability can be measured for the whole economy or for the productive sector only. Both are useful indicators: the first for current ‘health’ and the second for future ‘health’.

  4. Unlike classical predecessors Marx strongly emphasized a distinction between profits and surplus value and consequently the importance of use value.

    Surplus value arises from the differences between hypothetical average or “equilibrium” sales prices and costs including both raw materials wages. It is roughly distributed among rent, profit and interest over the period of a cycle, in rough proportion to capital or capitalization of shares of interest and rents.

    But surplus value produced in production can only actually be realised in sale, which may be deferred or accelerated and may be at at spread between prices for outputs and costs for inputs that depends on the effective demand and the phase of the cyle.

    This does involve but “effective demand” but very specific effective demand for what is actually being produced varying by sector and firm.

    Investment is the most fluctuating part of that which depends on prior fluctuations in profits. But these fluctuations in profits are not determined by long term averages of prices and costs in hypothetical equilibrium but by actual market prices and wages in the actual current conjuncture in each sector.

    Disproportions between the two main departments must inevitably result in difficulties in selling the output of one department to the other and consequent compression of the spread between its sale prices and costs and lower profitability and hence lower “expectations” and investment.

    If capitalism was “harmonious” that could just correspond to an opposite movement in the other department with wider sreads raising profits and so investment and reducing the disproportionately.

    But in reality there is a long lag between price signals that signal the need to supply from the department producing means of productin actually resulting in new plants coming on stream. So the workers and materials required for constructing new plant are a source of supply in both departments without being a source of demand. This does not equilibriate the divergencies between prices and values but actually intensifies them by signalling them at even more new plant must be constructed as the sprice spread and so profitability is still moving in the same direction.

    After a long lag the new plant goes on stream and there is a sharp reversal of the conjuncture as there is now a sudden increase in supply from the department producing raw materials and plant, far beyond what was needed to catch up with the previous demand from consumer goods producing department that has remained relatively static and no longer requires such a big increase. The result is a sharp decline in the spread for department producing raw materials and plant, with consequent fall in current profits and subsequent investment.

    Marx’s theory, quite different from either “Marxists” or “Keynesians” is clearly systematized and explained in chapter 2 of “The Capitalist Cycle” by Maksakovsky. It is also a lot more sophisticated and a lot less unicausal not based on excessive aggregation and ignoring distinctions between sectors and aggregates moving in different directions at different phases of the cycle.

    Chapter 3 explains how the financial system in their day amplified the cycle so that when the sharp turn came with constructed plant arriving online and becoming a source of excess supply there is an actual financial crash and consequent even sharper drop in prices not just towards equilibrium or average values (production prices) but well below them. That in turn provides the basis for ending the subsequent depression and resuming the next cycle because the changed price structure makes plant using previous labor intensive technology obsolete as unable to compete at the new much lower price and cost spreads (and lower average rate of profit) with the more capital intensive technologies that were available but “uneconomic” in the previous cycle. (Does not depend on concurrent discovery of new technologies but on their becoming viable as a result of the sharp changes in price spreads ignored in Michael’s account).

    Chapter 3 points out that “Keynesian” (Hilferding) policy could only intensify the eventual crisis by postponing it since the postponing through monetary and fiscal measures only prolongs and intensifies the divergence of the two departments from proportions that would enable them to exchange at “equilibrium” values (long run average production prices). The alternative (“Austrian”) policy would have a more stabilizing effect by having banks abruptly bring on crises when booms develop thus preventing the disproportions continuing to grow. But banks would not do this because they are tied to the firms that need to go bankrupt in each crisis to clear the way for the next cycle.

    A lot more theoretical work is needed to take into account the very different financial system in which Keynesian policies have successfullly postponed crises throughout the “Great Moderation” thus intensifying the disproportions and making the expected next crisis much bigger.

    Instead of we are getting simple repetition of a much less detailed theory that tries to draw conclusions from very simplified “profits drive investment” conclusions basedon aggregate rather than sectoral data. This contrasts with simple minded Keyneisanism but also contrasts with unsystematized fragments of a theory of the business cycle left by Marx and elaborated by Maksakovsky.

  5. (sigh) “So the workers and materials required for constructing new plant are a source of supply in both departments without being a source of demand.”

    Meant to be other way round. Source of continuing increased demand for more consumer goods from wages paid to workers and more means of prudction from purchases of raw materials to construct new plant. Later phase of cycle reverses this with the new plant becoming a source of supply (either for materials or consumer goods) and ceasing to be a source of demand (already constructed, does not need construction workers or materials).

    1. ”(sigh) ” So here is Arturo back on his ‘Bridge of Sighs.” Why does he not just toss himself over, and the rest of us can finally give a great sigh of relief!

  6. Dear Michael,

    It was great to meet you yesterday. I enjoyed your presentation very much indeed.

    Attached is my paper on the wage rate anchor and inflation targeting I mentioned to you yesterday.

    I will try and attend your talk tomorrow.

    Best regards


    ________________________________ De: Michael Roberts Blog Enviado: miércoles, 7 de marzo de 2018 07:11:50 a. m. Para: iph Asunto: [New post] UNAM 1 – The profit investment nexus

    michael roberts posted: “My first lecture the economics faculty of the Autonomous National University of Mexico (UNAM) was on the relationship between profits and profitability and investment and economic growth in capitalist economies. Do profits and profitability lead investmen”

  7. Good question! As Michael said, get rid of capitalism. But there is still no mass movement for that despite a long history of crises since 1820s. Last major crisis was more than 7 decades ago in 1930s so it is far from clear that point 4 is correct.

    More likely Maksakovsky was correct that such measures advocated by Keynes (earlier by Hilferding) could indeed mitigate crisis but only by postponing it which means also postponing recovery i.e. delaying recovery so that the disproportions that should be ended by crisis to prepare for recovery continue to get worse resulting in the eventual crisis having to be more intense for actual recovery.

    Maksakovsky correctly predicted that the 1920s near crises avoided by such measures would result in a bigger crisis later and the Harvard School “Review of Economics Studies” papers on the data confirmed that they had got their forecasts wrong by not accepting this. Neither he nor any other Marxist expected that such measures could postpone both crisis and recovery for as long as they now have, so that by the start of this century the very concept of a business cycle punctuated by crisis at the peak of a boom preparing conditions for recovery from the subsequent depression was forgotton.

    As far as I can see Michael’s account also has no theory of a cycle at all. Instead of phases of depression, recovery, prosperity, boom and crisis as described by Marx (and all honest observers of nineteenth century capitalism) Michael just has depression, stagnation and mitigation (as seen by all honest observers of the last decade) with no hint of Marx’s concept that the crisis is needed in order for the subsequent depression to have the conditions (specifically the price structure) that results in the depression giving way to recovery and another cycle with more capital intensive technology for greater productivity and higher real wages than the previous cycle.

    Empirically we have instead had the “Great Moderation” from second world war to 2007-8 Global Financial Crisis and no full scale crash even then. The recessions, including the Great Recession HAVE mitigated (“moderated”) the cycle, aborting the crisis phase and thus aborting the full recovery and next boom phase. Keynes may have got it right in saying “in the long run we are all dead”, though that is probably not the context.

    In my view it is simply not possible to have a correct theory of crisis that does not treat it as just one phase of a business cycle that has a regular series of phases following each other with each creating the conditions for the next (of varying lengths and intensity depending on much more concrete conditions than this abstract “pure theory”). That is what Michael and other macroeconomists following the current situation are attempting to do. It is like trying to figure out astronomical movements of the sun, moon and planets against a rotating background of fixed stars by just analysing the data, without a theory. Maksakovsky explains the methodological problem in Introduction and chapter 1.

    Such a theory HAS to explain the movement of prices and price spreads above and below values (production prices) which ARE the movements of profit rates (in different departments) above and below average. This HAS to be explained by disproportions (in one direction followed by the opposite direction) between sectors. None of this is in Micahel’s account. He just gets as far as profits determining investment rather than the other way round, which is almost as tautologous as its Keynesian opposite.

    Maksakovsky’s contribution neatly tied this together systematically with a focus on the lag between price spreads calling for a larger department producing means of production and the actual construction of the necessary plant. This delay causes that price spread to be amplified further and intensify the disproportions that had created it so that when the new plant does come on stream the reversal from underproduction with high profits to overproduction with low profits would produce a deep opposite swing in relative prices that would not “restore equilibrium” but make a lot of the plant technologically obsolete and thus create conditions for replacement investment in more capital intensive plant for the next cycle at a higher level of productivity and social development generally.

    The capitalist approach to “rebound after crisis” requires ACTUALLY HAVING the crisis. This was viable in the nineteenth century but the Great Depression clearly raised the prospect that workers might go for what Michael suggested if they let it happen again and get rid of the capitalist mode of production.

    They have done remarkably well in not letting happen again, but the consequence has been not much “rebound”.

    If we want to get rid of the capitalist mode of production following the next crisis we need to have a clear picture of how it works and what a rebound must involve.

    My initial thoughts is that while there is still wage labour and capital and trade between and within nations through money, revolutionary governments seeking to transition from capitalism have to seize control of enough capital to shift the direction of production towards soaking up mass unemploment with output diverted to investment in rapidly raising the level of the developing world and massively increased fundamental science and R&D for more productive technologies with more disposable free time rather than unemployment for everybody.

    This of course runs in direct opposition to trade union movements supporting Trumpist “protection” and greenies demanding reduction in living standards.

    There is an enormous amount of both theoretical and empirical work to do updating and applying Marx’s theory. Michael is far more likely to get somewhere doing it than I am. But he needs first to tear himself away from staring at these graphs and repeating the same refutations of Keynesian absurdities.

  8. My second comment above was meant to be reply to Derek at top of thread re point 4 though it also fits as response to Tony immediately above where it has ended up appearing.

  9. Nobody should hold back comments because of personal animosity.

    I have argued previously that a synthesis exists between the lack of consumption and the rate of profit. This synthesis is found when we examine the surplus produced by the working class and appropriated by the capitalist class. As Marx pointed out this surplus can be consumed either productively or unproductively. And if it is so consumed in its entirety regardless of division, but in a manner which corresponds to the output of the various departments of production, then production will equal consumption and demand will equal supply. This is the key point. If there is a failure of one element of consumption then of course production will exceed consumption.

    By unproductive consumption Marx meant the luxury consumption of the capitalist class for their own enjoyment and lifestyle. This is a burden on the working class and is the equivalent of throwing that segment of the surplus into the sea. The second element, productive consumption relates to investment, that element of the surplus thrown back into production in order for reproduction to take place on an expanded basis (depending on the phase of the industrial cycle). However, if we are to treat the surplus in its entirety we need to add a third element, that part of the surplus that is preserved for the purposes of speculation, which should it exceed the part reverting back to consumption, adds to speculation. It is the equivalent of adding chips to the table in excess of the chips being cashed in by the players and croupiers (banker salaries and bonuses spent on goods for example). If we were to assume the following: that the surplus is consumed because both productive and unproductive consumption is sufficient and that there is no net increase in preserved value for the purposes of speculation, then total demand will equal total supply and industry will operate at its capacity.

    The variable in this is of course productive consumption. The amount invested. Here Michael is quite correct. It is the rate of profit that allocates these three elements making up the surplus. And changes in the rate disturbs this allocation. A rising rate of profit increases productive consumption in the first instance, by reducing the amount of surplus value preserved for the purposes of speculation. It also tends to increase unproductive consumption over time because of the prospect of a greater mass of gross profit in the future. Conversely, the initial fall in the relative rate of profit tends to decrease productive consumption (investment) while increasing the amount of surplus value preserved for the purposes of speculation. This has the effect of undermining consumption. Because of the acceleration in speculation at this time, unproductive consumption is unaffected by the falling rate of profit as capitalists feel richer (though society is made poorer because of the fall in investment) and it could rise compensating for the fall in the rate of investment. Each stage needs to be examined on its merits.

    This all comes to an end with the crash predicated on the absolute fall in the rate of profit: that is a contraction in the mass of profit and the profit margin. The absolute fall in the rate of profit now kicks away the supports for speculation, which always and everywhere represents a bet on profits and interest, either directly, shares/bonds, or indirectly, on the prices of these instruments in the form of derivatives. At this point there is an actual destruction of preserved value both in the realm of speculation as well as in the real economy in the form of capital.

    The sum result is that the absolute fall in the rate of profit, collapses all three elements simultaneously whereas a rising rate of profit may not expand all three elements simultaneously, which means that even in the expansive phase, consumption may lag production. The easiest way to understand preserved value is to see it in its monetary form. The money that enters speculation, in so far as it is the monetary form of surplus value actually produced, is no different to the money which returns as capital to production except for its social use. In the former case it chases its own tail and in the latter case is used to purchase the factors of production, in the former case it makes more money through not being converted and in the latter form it makes more money through being converted into industrial capital.

    Hence when examining the issue of the perennial imbalance between production and consumption, now chronic then acute, we must start with the surplus of society and its disposition, and understand how the rate of profit alters and disrupts that disposition.

  10. Isn’t it possible that causation goes both ways? In my theory, it does, but only under certain conditions. In general, profits drive investment. But at low rates of capacity utilization (what I call the “Keynesian region”), higher investment can increase the realization of profits and raise the profit rate. In this situation, government spending can help both demand and investment by raising capacity use. At high rates of capacity utilization (the “Marxian region”), there is also a profit squeeze (due to low unemployment) so that the “supply side” limits on profits mean that increased investment — or increased government spending — can only hurt profitability. This is a relatively short-term or “cyclical” model, so I wouldn’t use it to describe changes between decades. It does say that Keynesian expansion only works when unused capacity is widespread.
    The only profit squeeze that persisted for more than a year (that I know of) occurred during the late 1960s: war spending and its inadequate financing via taxes kept the economy at relatively high employment despite the normal tendency for low profitability to depress investment spending.

    1. As far as I know that is indeed all that Keynesians really claim (though I still haven’t managed to grasp the details endlessly discussed by many).

      Also they are supposed to follow an opposite policy of fiscal restraint when instead of unused capacity there is a boom so that overall they are not just continuously increasing government debt.

      It is somewhat notorious that this is not what has been happening. Over the decades “Keynesian” remedies have been applied each time the economy looks like being about to crash and each time a full crash has been postponed but there never comes a time when some “magic” enables them to reverse the greater debt and imbalances as the rate of profit has not increased to previous levels as it did with the “normal” cycle in the 19th century (leaving aside the very slow long term tendency to decline).

      In the linked paper “The Profit Investment Nexus” this is illustrated at Figure 4 on p5. There is clearly an ongoing “business cycle” with rises and falls in the rate of profit. But whenever the rate of profit heads down something stops it plummeting into recession with a negative profit rate. Presumably this is the active “Keynesian” measures endlessly discussed by central banks and government budgets.

      But although those measures do prevent crashes and even negative profits (even for the GFC) the profit rates do not quite bounce back to previous levels and there is an overall trend down.

      I am not sure if I follow Michael’s argument correctly. Seems to be suggesting this overall trend represents long term tendency for rate of profit to decline (due to rising organic composition of capital) whereas nothing in the data suggests it is not the result Maksakovsky expected from preventing crashes by Keynesian methods – intensified disproportionalities.

      On the other hand references to “profit squeeze” suggest the theory of rising wage shares inducing a reaction to restore profits by contracting to increase unemployment and push back wage shares. That may be what the “profit cycle” figure 2 on page 4 is supposed to be about. But that is obviously inconsistent with the reality of falling wage shares.

      As far as I can make out the main content of the paper is simply accepted as obvious by mainstream economists eg as quoted on p9:

      “Deutsche Bank economists [23] also noted that “Profit margins always peak in advance of recession. Indeed, there has not been one business cycle in the post‐WWII era where this has not
      been the case.The reason margins are a leading indicator is simple:

      when corporate profitability declines, a pullback in spending and hiring eventually ensues.

      ”Deutsche goes on: “the historical data reveals that the average and median lead times between the peak in margins and the onset of
      recession are nine and eight quarters, respectively” (Figure9).

      As stated, this reason is simple. The many other quotes confirm it is widely accepted.

      Decline in profit margins can be described as a “profit squeeze”. But it cannot be the usual “marxian” claims about wages squeezing profits since wages have been notoriously stagnant and wage share declining.

      So margin squeeze must reflect a relative decline in the prices obtained for outputs relative to the prices of costs paid for other (non-wage) inputs. That necessarily implies disproportionality between the sectors producing outputs and those producing inputs.

      The assortment of outputs can never be the same as that of inputs since some outputs go to personal consumption while all inputs are of means of production. That is what makes it possible for the price indexes of outputs and inputs to diverge. They are not calculated on the same assortments.

      The accepted FACT that there is a squeeze in profit margins necessarily implies that there must be disproportions between Department I producing means of production and Department II producing goods and services for consumption.

      There ought to be a lot more interest in Maksakovsky who explained Marx’s “Theory of the Capitalist Cycle” on this basis. Available from Library Genesis:


    2. The production of surplus labour is not synonymous with the production of unpaid labour because the former has to be converted into its monetary equivalent through being exchanged. Hence the production and realisation of surplus/unpaid labour are two distinct phases which can become disconnected. You are therefore correct to point out that a rise in investment in so far as it reduces the gap between surplus labour being produced and unpaid labour being realised is associated with a rise in the mass of profit. The same applies to increased government spending at this stage. I have also argued more generally that since 2008 a crisis of realisation has existed in the world economy despite the growth in speculation that has boosted the consumption of luxury goods and this is one of the reasons for low productivity. I would add, the issue of realisation has ebbed since mid2017, though with rising interest rates, and the subsequent deceleration of the world economy in 2018, it may reappear.

      1. that makes sense to me. BTW, in vol. III, Marx has a useful phrase, referring to the contradiction between the production and production of surplus value. Alas, as with a lot of stuff in vol. III, he didn’t elaborate.

  11. Arthur, are you saying that in the expansion there is increased demand which forces prices up and profits to increase and investment in factories to increase. The investment in factories to satisfy the increased demand creates jobs which then add to the demand and the rush to build more factories. When the factories are being completed then those workers are no longer employed and no longer are part of the demand equation.

    This means that demand is falling and therefore the price is falling and the profit is falling and the need for new factories already under construction has ceased. The oversupply by zealous capitalists has caused an oversupply which can only be dealt with through a crash and prices falling below value and a movement to an average higher technology is required to get a boom started?

    1. More or less, but I cannot summarize Maksakovsky very concisely. He is presenting a schematic “toy model” only slightly closer to the concrete details than Marx’s reproduction schemes which have only 6 variables c + v + s for two departments.

      Key point is that after any of the regular crashes that used to occur with each cycle, profit margins and prices fall well below values, especially for the department producing means of production including new plant. This makes the existing labor intensive technology obsolete and previously uneconomic capital intensive technology more economic. So there is a wave of replacement investment that starts off a new cycle. Only those with the technology optimized for current price, profit and wage levels can compete successfully. Others go under.

      Then something like your summary – actual production supply from new plant only arrives when constructed so during the lag meanwhile the demand and supply disproportions are actually intensified resulting in a sudden switch from underproduction in the boom with rising margins from demand exceeding supply to sudden collapse when the new supply comes on stream after new plant constructed.

      This is seen regularly in individual sectors – eg “hog cycle”, “corn cycle”. The shipping cycle is roughly two years. Maksakovsky explains that the regular business cycle starts with these waves of replacement for an entire department rather than an individual sector and goes step by step through until another crash results in another wave and new cycle – each time at a higher technological level (whether or not there have been new “inventions”).

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